Andrew Coyne: Jim Flaherty adds $150B to national mortgage, then lectures on evils of too much debt

Jim Flaherty adds $150B to national mortgage, then lectures against debt

Following his path-breaking intervention to spare consumers the horror of lower mortgage rates, can we expect the finance minister to act with the same boldness should competition threaten to break out in other sectors?

Garry Marr: Does the finance minister believe that the consumer has his back so far to the wall or is so dense that a basis cut of 20 points is going to make all the difference in whether to buy a house?

The risk of what the minister called a “race to the bottom,” after all, is ever present, and while I’m sure he maintains a constant vigil, even Jim Flaherty may not be able to call in time to stop some shady operator from cutting prices — not even with the full-time staff he apparently keeps on hand for such emergencies. I don’t want to cause a panic, but I’m told that, as we speak, Sobeys has a special on canned peaches.

Indeed, the financial sector itself contains a number of rogue institutions who, notwithstanding the minister’s threatening voicemails, persist in using lower rates to lure customers from their competitors. To be sure, most are unwilling to do so publicly (“Obviously, it’s very sensitive,” a mortgage specialist whispered to the National Post, on condition that he not be named), but there are reliable reports that, behind closed doors, bank managers have been offering mortgages for less than the posted rate.

How on earth did it come to this? Every street-corner crackpot thinks the banks are in cahoots to keep interest rates high, but it takes a special kind of loon to conjure up a conspiracy to cut rates. It wasn’t so long ago that the minister was condemning the banks for not lending freely enough. Now it seems they’re too eager.

And don’t think it will end here. It’s rate cuts today, but it will be raises in rates that inspire some future departmental drunk-dials. That’s what happens when you make decisions on mortgage lending an extension of the minister’s index finger.

I know, I know. The minister is concerned at the level of household indebtedness, and the potential exposure of many Canadians — and the banks — to a correction in the housing market. That’s legitimate in principle, though “moral suasion” has traditionally been something carried on in private by the Bank of Canada, rather than bellowed in public by elected politicians. And so far as the minister has a concern, fixing rates by fiat is entirely the wrong way to address it.

We don’t leave banking entirely to the bankers, of course, any more than we leave air travel to the airlines. In both cases, there are risks, whether to their immediate customers or to the broader public, that we are unwilling to trust the industry to mitigate on its own.

Probably the threat of lawsuits would be enough to persuade most airlines to take the steps necessary to avoid killing their passengers. But just to be sure, we also regulate them, in case the pressures of competition should tempt them to take shortcuts.

While I’m sure he maintains a constant vigil, even Jim Flaherty may not be able to call in time to stop some shady operator from cutting prices

But notice how we do it. We regulate for safety: how often the planes have to be serviced, how much rest the pilots have to be given between flights, and so on. We don’t regulate prices. We don’t want airlines to compete by taking risks with passenger safety. We do want them to compete on price.

The same, by and large, applies to banking. Regulating for risk, for example setting minimum capital and leverage ratios, yes. Interest rate floors, no. That was, I had thought, one of the lessons of Canada’s relative success in recent years: avoiding micro-managing bank practices, in favour of broad prudential guidelines. And indeed that had seemed to be the approach the minister favoured with regard to the problems of household debt and inflated housing prices.

I don’t happen to think that either is anything like the problem they have been made out to be. Yes, prices have risen to historically high levels in Toronto and Vancouver, but there’s no evidence of a generalized “housing bubble.” Household debt may be at record highs, relative to income, but it is not high relative to household assets — just 20%. If households are taking on so much debt, it may be because they can afford it: at roughly 26% of disposable income, mortgage payments (principal and interest) are barely half what they were at their 1990 peak.

The only thing that could disturb all this is a sudden spike in interest rates. But in a country that enjoys a strong political consensus around low inflation and flexible exchange rates, it is very hard to see what could cause this. In any event, so far as we do have a problem, the steady tightening of amortization periods for federally insured mortgages in recent years would appear to be having the desired effect.

Or to put the matter another way, so far as we have a problem it is largely of the government’s own making. The whole system of mortgage insurance, as administered by the Canada Mortgage and Housing Corp., is riddled with implicit subsidies that encourage excessive risk, and was even before the advent of the 35- and 40-year mortgage.

And beyond the CMHC is a bevy of other Crown corporations with much the same mandate: for example, Farm Credit Canada, now under scrutiny by the Office of the Superintendent of Financial Institutions. If the minister is worried about people taking on too much debt, he would do better to stop encouraging lending to bad risks, rather than punishing borrowers with good credit.

But then, as long as we’re talking about bad credit: Is it not just a little galling, having to listen to lectures on the evils of too much debt, from the man responsible for adding $150-billion to the national mortgage?